EFS Consulting

Implications of the resistance against the EU Supply Chain Law

As the industry pushes back, the EU faces the struggle to implement its goal on sustainability. 

News has travelled across European countries in the last weeks on political parties voting against the implementation of the proposed EU Supply Chain Law. What is the reason behind it? What are the effects of the seeming lack of consensus between the industry and the regulators? This insight will cast a light on the topic.

A legal basis for international human rights and environmental protection

The proposed EU Directive on Corporate Sustainability Due Diligence, as the EU supply chain law is officially called, is intended to oblige large companies to respect human rights and environmental protection along the entire supply chain.

The directive should apply to companies with 500 employees or more and an annual turnover of € 150 million. For certain high-impact sectors, such as the textile industry or agriculture and forestry, the rules are to apply from 250 employees and a turnover of € 40 million. In addition, companies that are not based in the EU are also to be covered if they generate more than €150 million net annual turnover in the EU. Small and medium-sized companies are exempt from the directive.

At the center of the requirements is the drawing up of a company plan to orient the business model towards the transition to a sustainable economy and limiting global warming to 1.5 degrees Celsius. Companies must also provide for grievance mechanisms for those affected, as well as for employee representatives and civil society organizations.

Industry calls for improvements

The law is a thorn in the side of the industry as it poses ample challenges for the companies. Among those are increased bureaucracy and incapabilities to receive full information on the different actors along the supply chain. Furthermore, these activities require financial resources and add to the increasing burden for companies to be compliant based on multiple different laws.

As representatives of the industry, business associations and political parties have emphasized the positive perception of fulfilling the important goal of sustainability. In their eyes, however, the requirements cannot be put into practice or may even be not adequate to work towards that goal. Furthermore, it could lead to companies withdrawing from the European market and, thus, leading to significantly lower standards.

Different standpoints – and a potential final end of the regulation

To address the concerns by the industry, the European Commission has already offered far-reaching concessions. They would reduce the scope of the regulation by excluding the smaller companies in the high-impact sectors. Therefore, the regulation would only apply to large companies with at least 500 employees or an annual turnover of over € 150 million. Additionally, it has proposed to postpone the coming into force from 2029 to a later date. This would give companies ample time to prepare for the implementation.

Nonetheless, the industry does not want to cave in, and an alliance of business associations has called for improvements to the law. Furthermore, there seems no consensus in the federal governments of multiple EU states regarding the position on the law. These developments lead to the conclusion that there seems to be no majority among the EU Member States. The voting on the proposal has, thus, been postponed, and the talks on a European level reduced.

This is not the first time the European Commission has had to make drastic concessions on regulations regarding sustainability. The Euro 7 regulation on vehicle emissions, for example, did not bring any drastic changes in emissions targets for light-duty vehicles after a powerful pushback by the industry (see insight here). Nevertheless, it wants to maintain its ambitious vision to be a pioneer in drafting legislation for increased human and environmental protection. It remains interesting what the new Commission after the European Parliament elections in June will propose.

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The Supply Chain Due Diligence Act
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